According to the boss of one of London’s largest independent investment banks, the capital markets will be “dead”, if current trends continue.
Peel Hunt’s chief executive Steven Fine said that the London market for initial public offering was moribund and there were no signs of revival.
He said, “Our industry is a hollowed-out shell in the last five to ten years.” If we continue on this path, we will end just like the Irish Market which is dead.
London IPOs only raised £0.3bn during the first quarter. This is a contrast with mainland Europe, where major flotations include the 2.3bn floatation of dermatology group Galderma as well as retailer Douglas which raised about €850mn.
He said that the trend was driven primarily by acquisitions made of UK-listed firms, the lack of new potential issuers, and outflows of funds investing in UK equity.
He said: “The M&A is relentless, and de-equitisation has been a problem. The lack of replenishing the hoppers is a big problem.” “I am not convinced that the IPO market will open anytime soon.”
Fine made his comment after Peel Hunt released a trading update for the end of the year on Wednesday. The company said that it expected revenues to increase by 4 percent year-over-year, to £86mn. This was due to takeover activity because UK IPOs were “muted”. This compares to revenues of nearly £200mn for the year ending March 2021.
Peel Hunt published research suggesting that the FTSE SmallCap Index may cease to exist in 2028 due to takeovers. The research shows that funds investing in UK companies experienced 34 consecutive months of outflows. This has led to a drop in valuations and prompted managers to question why companies are listed.
Fine stated that the UK’s capital pools are severely constrained due to outflows of money which show no signs of returning. The capital markets are at a standstill.
At the beginning of this year, the number of takeovers by UK listed companies has increased. Bidding Wars have been waged for packaging group DS Smith and telecoms testing company Spirent, as well as logistics group Wincanton.
Several large UK listed groups, including the gambling group Flutter as well as building materials group CRH are moving their primary listing to New York.
Fine said that in addition to a lackluster investor demand for UK shares, would-be IPOs are being held back because “valuations do not match up with reality”.
Private equity groups are also “constipated” by the pressures to sell assets and make investments, as well as the records that exist in this industry.
Lisa Gordon, chairwoman of Cavendish UK, a rival broker, was optimistic. She believes that the market will pick up in the next few months, as central banks are poised to lower interest rates. The lower borrowing costs “had to feed directly into the appeal of equity.” She said that logically, people would say “the market is in better times”.
The UK equity market has slowed down, leading to consolidation in the smaller brokerages. Cavendish is the result of a tie up last year between Cenkos, FinnCap and Cenkos.
Fine stated that Peel Hunt is the most independent of its competitors and has 150 clients, including 43 from the FTSE 350.